In insecure times it seems only natural for people to seek comfort in what they know. This is precisely what is playing out now in the United Kingdom as the global economy reels from a second fossil fuel shock in five years. Calls on the Starmer government to expand drilling in the North Sea are, after all, an example of people trying to hold on to a world which no longer exists.
Proponents hope that unwinding Labour’s ban on new exploration licences and lowering tax rates on North Sea fossil fuel producers would increase production, boosting the UK’s energy security and tax revenue. But such hopes are not borne out by reality. Worse, a politics of accommodation will only hinder the transition to modern, viable energy sources that will increase our security and, ultimately, tax revenues.
As a result of the Iran war, at least 10 per cent of the global oil supply is no longer available on the world markets. But the central problem with championing domestic oil and gas over foreign imports is that there is nowhere near enough of either in the North Sea to replace lost (or in the future, insecure) supply. We currently produce one million barrels of oil and gas a day, a number that will almost halve in the next few years. To put this into perspective, the Iran war has removed an estimated 12m barrels each day globally.
The UK will still use some gas for the next 25 years under the government’s current net zero plans. Dwindling domestic reserves mean the vast majority of gas will be imported. Even if reserves are strong, however, domestic production will only reduce our imports by a few percentage points. This is complicated by the fact that extractors don’t know what proportion of a well is oil and what share is gas until they start digging. Domestic production will only reduce gas imports if we repeatedly strike gas, not oil, in the North Sea.
The reason that production isn’t higher isn’t because of government policy, it’s because the resource isn’t there. Even under the entire Conservative administration’s policy of extracting everything that was financially viable, North Sea production was lower by the 2024 general election than when the Tories first entered office in 2010.
Given that the UK will be importing oil and gas no matter what, Britain’s energy security depends on the ability to pay for fuel. As we saw after Russia’s invasion of Ukraine in 2022, and as we can see now, the UK can secure adequate resources, it just has to pay top price. Remember that the government doesn’t own the oil and gas in the North Sea in any case—private companies deliver to the highest bidder.
Proponents of North Sea drilling say that opposition to it is akin to former deputy prime minister Nick Clegg in 2010 rejecting new nuclear energy as too slow and expensive. Yet electricity demand was (and is) only growing and flows directly into the UK grid. Gas demand is falling, and will flow where prices and energy supplies dictate. Clegg would at least have got a guaranteed cost; with gas you have no idea what price you’re getting because prices are set by volatile international markets.
Meanwhile, as the Office for Budget Responsibility shows there is very little relationship between oil and gas production and tax receipts, leaving aside the initial discovery of fossil fuels in the North Sea in the late 1970s and early 1980s. At that time, both production and tax revenues rose from a very low base. Tax revenue shifts with the global price of oil and depending on the tax rates set by government. And the government has kept rates on oil and gas high because it is trying to maintain the same level of income from fewer resources.
The oil and gas industry argues that, to boost production, tax rates need to fall. But, according to the International Energy Agency, it takes 20 years from issuing a new exploration license to actual production. Lowering tax rates to incentivise investment would mean two decades of lower revenue, wiping billions off the government’s fiscal headroom.
Some argue that if the UK is going to use gas it’s better for the climate to use cleaner, UK-produced gas than supply that is processed overseas. Liquefied natural gas imports are more carbon intensive than UK production because of the energy used to compress gas and then transport it across oceans. But this argument ignores the fact that our domestic production is significantly more polluting than, say, a country such as Norway, which has fully electrified platforms. And focusing on carbon intensity as an argument for relying on UK-produced gas ignores any much larger potential emissions savings to be made from showing other countries that producer economies like Britain can transition to cleaner energy.
At a time of global insecurity, many think that sounding pragmatic at home must be popular and a good concession in order to protect support for clean energy in the face of concerted opposition. But voters are not leaving the government because of its North Sea policies. Even for those defecting to Reform UK, just 4 per cent say that the limit on domestic oil and gas extraction is one of the reasons they’re not voting Labour. People aren’t going to reward the government for changing a position they either do support or don’t know about. Yet by triangulating a “sensible”-sounding position, the government will look like it has made yet another U-turn.
Some are wary that North Sea job losses could be a political millstone, wanting to avoid the mistakes of Thatcher and the coal industry. Around 30,000 people are directly employed by the North Sea energy sector, mostly in Aberdeen. UK universities are projected to have shed around that amount in the last three years, to much less resistance. The coal industry under Thatcher comprised more than 200,000 employees. Today, offshore workers are mostly well-paid, near retirement and used to an industry that sheds jobs whenever oil prices change. Despite maximum economic recovery and low tax rates, indirect employment in the North Sea oil and gas sector halved between 2015 and 2020 as reserves decreased.
Misplaced arguments around the North Sea delay our ability to transition to technologies that genuinely will improve UK energy security: renewables and electrification. Eking out the last few drops is not a sufficient answer to insecurity, nor is it one the public is actually looking for. New licenses are at best the equivalent of a sticking plaster. Political capital and government resource are being used to debate the inevitable decline of an incumbent industry, rather than supporting the growth of a new and more productive one. For all the talk of economic growth and dynamism, Schumpeter would be turning in his grave at our desire to hold onto such inefficient and unproductive technologies.
